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Apr 07, 2020

Covid-19 response highlights shift to stakeholder value

New research attempts to quantify support offered by companies during outbreak

The high number of companies stepping up to help Covid-19 relief efforts underlines the shift in corporate focus from shareholder to stakeholder value, according to a report from Bank of America Merrill Lynch (BofAML)’s Global Research team. 

The bank asked its equity analysts around the world to provide names of companies that are taking action to help with the spread of Covid 19 – and they came back with more than 400 examples. 

‘We estimate the initial round of corporate giving amounts to more than $875 mn in cash donations and 16.5 mn free masks,’ write the report authors. ‘Forbearance and deferred collection of interest, rent and telco/utility bills could dwarf this amount. For illustrative purposes, globally banks could defer $400 bn of interest.’

In recent years, companies have shifted away from the traditional focus on shareholder value above all else. Last year, 181 US CEOs released a statement declaring that companies would now be run in the interests of all stakeholders: customers, employees, suppliers, communities and shareholders.

Companies have also come under increasing pressure from investors, regulators and lobby groups to incorporate ESG issues – which include supporting local communities – into their business strategy. 

BofAML writes that there has been ‘a sea change in corporates from focusing solely on shareholders to a broader focus on stakeholders… As the magnitude of Covid-19 grows, we have seen this play out.’

The bank also notes that companies that emphasize the S in their ESG credentials can gain an edge over competitors. ‘Companies allocating resources to the Covid-19 crisis are likely to foster employee and community goodwill and to enhance brand and reputation – all of which have been critical drivers of performance in general and even more so recently,’ explains the report. 

‘In fact, companies with a track record of good employer/employee relations have markedly outperformed peers during this bear market. And companies with high rankings have outperformed the S&P 500 by 5 percentage points during the recent sell-off.’

Sustainable investment funds have performed well over the first quarter of 2020: 70 percent of sustainable equity funds in the US finished in the top half of their respective categories, according to data from Morningstar.

The main reason for the outperformance is likely to be the inclusion of top ESG performers, which are considered quality companies by investors and ‘hold up better than their lower-quality counterparts in difficult markets,’ says Morningstar.

Speaking to IR Magazine, Joanne Wong, senior managing director at FTI Consulting, says how companies act during the Covid-19 outbreak will help to demonstrate their approach to ESG issues. 

‘One of the Covid-19 lessons is that the investment community could use how companies deal with their employees as an indication of their readiness, values and approach to supply-chain communications and customer engagement,’ she says. ‘In other words, companies should remember that the S [in ESG] also includes employee strategy and engagement.’

ESG issues could further play a key role in deciding which companies emerge strongest from the downturn, adds Wong. ‘As companies are weathering through Covid-19 and preparing for business recovery down the road, the need to highlight and communicate their ESG efforts could become a key differentiating factor,’ she says.

During the Covid-19 outbreak, which so far has caused a reported 1.2 mn cases and more than 70,000 deaths worldwide, the private sector has offered support to local communities in a variety of ways. Examples include LVMH using perfume factories to manufacture hand sanitizer, Unilever donating goods to health authorities and NGOs, and banks offering mortgage payment holidays.

The crisis is proving a stern test for the commitment of companies to stakeholder value, however. Government action to limit the spread of coronavirus – such as imposing lockdowns and shutting non-essential services – has devastated entire industries.

Paul Polman, former CEO of Unilever and a campaigner for sustainable business practices, summed up the situation in a recent post on LinkedIn.

‘Responsible capitalism, which seeks to move corporate culture beyond shareholder primacy, now faces its biggest test yet,’ he wrote. ‘Today’s CEOs are knee-deep in invidious choices as they attempt to absorb losses, steady cashflow and balance the competing needs of their investors, customers, staff and suppliers.’